This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this quarterly report, contain certain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as "anticipates," "in the opinion," "believes," "intends," "expects," "may," "will," "should," "could," "plans," "forecasts," "estimates," "predicts," "projects," "potential," "continue," and similar expressions may be intended to identify forward-looking statements.
Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. Readers should bear in mind that past experience is never a perfect guide to anticipating actual future results. Risk factors affecting the Company's forward-looking statements include, but are not limited to, the following: general, worldwide economic conditions, the level of interest rates, crude oil prices, commercial and consumer confidence, and currency exchange rates; specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company's cost-management and productivity improvement efforts; the Company's ability to manage its business effectively in a period of slowing growth in sales and its capacity to make necessary adjustments to changes in demand for its products; competing technologies and difficulties entering new and expanding markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; the availability of sufficient levels of cash flow from operations and credit on favorable terms, whether from Danfoss A/S, the Company's majority stockholder, or from the capital markets or traditional credit sources to enable the Company to meet its capital needs; claims, including, without limitation, warranty claims, field recall claims, product liability claims, charges or dispute resolutions; the ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment, especially in light of the persistence of tight credit markets; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers and suppliers; sovereign debt crises, in Europe or elsewhere, and the reaction of other nations to such crises; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate, including regulations affecting retirement and health care benefits provided to Company employees; actions by the U.S. Federal Reserve Board and the central banks of other nations, including heightened capital requirements imposed on Chinese banks; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by credit rating agencies; changes in accounting standards; worldwide political stability, including developments in the Middle East; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. and NATO military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.
The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are further described in Item 1A (Risk Factors) in the Company's latest annual report on Form 10-K filed with the SEC, which should be reviewed in considering the forward-looking statements contained in this quarterly report.
About the Company
Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures, and markets its products in the Americas, Europe, and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.

Executive Summary - Three Months Ended September 30, 2012

The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the Company's third quarter 2012 and 2011 results from operations, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.

                                        Three Months Ended     Currency       Underlying       Three Months Ended
(in millions)                           September 30, 2011    Fluctuation       Change         September 30, 2012
Net sales                                          483.3     $     (23.6 )   $     (49.4 )   $         410.3
Gross profit                                       154.8            (9.7 )         (12.4 )             132.7
% of Sales                                          32.0 %                                              32.3 %

Selling, general and administrative
and Other                                           54.7            (4.0 )           6.2                56.9
Research & development                              16.2            (1.0 )             -                15.2
Total operating costs                               70.9            (5.0 )           6.2                72.1
Income from operations                  $           83.9     $      (4.7 )   $     (18.6 )   $          60.6
% of Sales                                          17.4 %                                              14.8 %

Net sales for the third quarter 2012 decreased 10 percent compared to the third quarter 2011, excluding the effects of currency. Excluding the impacts of currency, sales declined 2 percent in the Americas, 14 percent in Asia-Pacific, and 18 percent in Europe. Sales in the Work Function segment declined 17 percent, followed by decreases of 10 percent in the Propel and Controls segments and 5 percent in the Stand-Alone Business segment.

Income from operations decreased 22 percent, excluding the impacts of currency. The reduction was driven by an 8 percent decrease in gross profit, mainly due to lower sales volume, as well as an 11 percent increase in selling, general and administrative costs. Selling, general and administrative costs were negatively impacted by executive separation costs of $2.1 million recognized during the third quarter 2012.

Following is a discussion of the Company's operating results by market, region, and business segment.

Operating Results - Three Months Ended September 30, 2012 Compared to Three
Months Ended September 30, 2011

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table
and following discussion is on a comparable basis, which excludes the effects of
currency fluctuations.

                            Americas               Asia-Pacific                Europe                    Total
                      $ Change   % Change      $ Change   % Change      $ Change   % Change      $ Change    % Change
Agriculture/Turf
Care                 $    8.1       11  %     $    1.3       48  %     $  (17.4 )    (32 )%     $    (8.0 )     (6 )%
Construction/Road
Building                 (3.2 )     (8 )          (4.5 )    (13 )          (5.1 )    (13 )          (12.8 )    (11 )
Specialty                 0.5        2            (2.3 )    (24 )         (10.1 )    (14 )          (11.9 )    (11 )
Distribution             (9.2 )    (14 )          (6.0 )    (17 )          (1.5 )     (5 )          (16.7 )    (13 )

Agriculture/Turf Care

The agriculture/turf care markets experienced a 6 percent decrease in sales in the third quarter of 2012 compared to the same period in 2011. Agricultural sales in the Americas remained strong overall and continue to benefit from high commodity prices as well as a strong sugar cane market in Brazil, while sales in South America have been negatively impacted by restrictive trade

laws in Argentina. Sales in the turf care market continue to show improvement due to growing consumer confidence. Agriculture and turf care sales in Europe were down due to the overall weakening of the European economy. In addition, sales were negatively impacted by the fact that one large customer slowed production during the quarter while implementing a new production line as well as a new business system. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

Sales in the construction/road building markets declined in all regions during the third quarter of 2012 compared to the same period in 2011. The sales decline in the Asia-Pacific region was driven by reduced demand for rollers and transit mixers in China as well as customers' focus on reducing inventory levels. Sales in Europe were down due to reduced demand for rollers and pavers as a result of a weakened European economy. The sales decline in the Americas was driven by depressed road building markets due to limited spending by state and local governments due to budget constraints.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Overall sales into the specialty vehicle market decreased 11 percent in the third quarter of 2012 compared to the same period in 2011. Sales in Europe declined due to weakening forestry and mining markets as well as reduced demand for telehandlers and truck-mounted cranes. Sales in the Asia-Pacific region declined largely due to suspended infrastructure programs in China and reduced demand for marine applications. Sales in the Americas benefited from increased demand for aerial lifts and renewed investments in aging rental fleets.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by reportable segment relates to information as presented in Note 10 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, loss on early retirement of debt, income taxes, and noncontrolling interest. Propel products include hydrostatic transmissions and related products that transmit power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and hydraulic integrated circuits, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of the vehicle, but are marketed under their own names and operate as stand-alone businesses.

The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.

                                            Three Months Ended       Currency       Underlying       Three Months Ended
(in millions)                               September 30, 2011      Fluctuation       Change         September 30, 2012
Net sales
Propel                                    $         235.1          $      (7.9 )   $     (22.5 )   $         204.7
Work Function                                        89.3                 (7.0 )         (14.9 )              67.4
Controls                                             82.7                 (4.8 )          (8.2 )              69.7
   Stand-Alone Businesses                            76.2                 (3.9 )          (3.8 )              68.5

Segment income (loss)
Propel                                    $          51.5          $      (2.7 )   $      (6.0 )   $          42.8
Work Function                                        13.4                 (1.2 )          (3.8 )               8.4
Controls                                             23.3                 (1.5 )          (4.3 )              17.5
Stand-Alone Businesses                                5.3                 (0.4 )           0.8                 5.7
Global Services and other expenses, net              (8.3 )                0.8            (4.7 )             (12.2 )

Propel Segment

The Propel segment experienced a 10 percent decrease in sales, excluding the effects of currency fluctuations, during the third quarter 2012 compared to 2011 largely due to weakened economic conditions in China and Europe. Segment income decreased by $6.0 million during the quarter when compared to the same period in 2011, excluding the effects of currency, primarily due to reduced sales volume. Also contributing to the reduction in segment income was a $2.9 million increase in operating costs, partially due to the Company's continued investments in China as part of its long-term growth strategy. Partially offsetting the negative impact of reduced sales volume and increased operating costs in 2012 was a $2.1 million reduction in warranty & field recall costs.

Work Function Segment

The Work Function segment experienced a 17 percent decrease in sales during the third quarter of 2012 when compared with the same period in 2011, excluding the effects of currency fluctuations. The decrease in sales was largely due to the weakened European economy. Segment income decreased $3.8 million primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 2 percentage point increase in contribution margin, which was driven by higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar.

Controls Segment

Net sales in the Controls segment decreased 10 percent during the third quarter of 2012 compared with the same period in 2011, excluding the effects of currency fluctuations. Segment income decreased $4.3 million primarily due to reduced sales volume, as well as a $1.2 million increase in operating costs.

Stand-Alone Businesses Segment

The Stand-Alone Businesses segment experienced a 5 percent decrease in sales during the third quarter of 2012 compared with the same period in 2011, excluding the effects of currency fluctuations. Segment income increased $0.8 million despite the reduction in sales volume largely due to fixed production cost reductions of $0.9 million as well as reduced operating costs of $0.3 million.

Global Services and other expenses, net

Costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses increased $4.7 million, excluding the impacts of currency. The Company incurred executive separation costs of $2.1 million during the third quarter of 2012, as well as increased incentive plan costs of $1.1 million during the quarter when compared to the same period in 2011. In addition, the Company recognized a gain on foreign currency transactions of $0.3 million during the third quarter of 2012 compared to a gain of $0.9 million during the same period in 2011, which is reported as other, net in nonoperating income (expense) on the consolidated statements of operations.

Income Taxes

The Company's effective tax rate was 23.6 percent for the third quarter of 2012 compared to 25.1 percent for the same period in 2011. The decrease in the tax rate is partly attributable to the fact that valuation allowances in Italy of $2.9 million were reversed in the third quarter of 2012. The Company's tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Executive Summary - Nine Months Ended September 30, 2012

The following table summarizes the Company's results from operations, separately
identifying the impact of currency fluctuations for the nine months ended
September 30, 2012 and 2011. This analysis is more consistent with how the
Company internally evaluates its results.

                                        Nine Months Ended      Currency       Underlying     Nine Months Ended
(in millions)                           September 30, 2011    Fluctuation       Change       September 30, 2012
Net sales                               $     1,611.4        $     (56.5 )   $     (51.8 )   $     1,503.1
Gross profit                                    534.7              (23.2 )         (16.5 )           495.0
% of Sales                                       33.2 %                                               32.9 %

Selling, general and administrative
and Other                                       166.4               (8.8 )          18.3             175.9
Research & development                           45.8               (2.5 )           4.5              47.8
Total operating costs                           212.2              (11.3 )          22.8             223.7
Income from operations                  $       322.5        $     (11.9 )   $     (39.3 )   $       271.3
% of Sales                                       20.0 %                                               18.0 %

Net sales for the nine months ended September 30, 2012 declined 3 percent when compared to the same period in 2011, excluding the effects of currency. Excluding the impacts of currency, sales increased 9 percent in the Americas, while sales decreased 24 percent in Asia-Pacific and 7 percent in Europe. Sales in the Stand-Alone Businesses segment were up 2 percent, while sales in the Work Function and Propel segments declined 11 percent and 3 percent, respectively. Sales in the Controls segment remained level when compared to the same period in 2011.

Income from operations decreased 12 percent, excluding the impacts of currency. Contributing to the decrease was a 3 percent reduction in gross profit driven by lower sales volume, partially offset by a $2.6 million reduction in warranty & field recall costs. Also contributing to the reduction in income from operations was an 11 percent increase in total operating costs compared to the nine months ended September 30, 2011. Total operating costs were negatively impacted in 2012 by the fact that the Company recognized executive separation costs of $2.2 million and restructuring costs of $0.9 million related to the reorganization of the European sales organization.

Following is a discussion of the Company's operating results by market, region, and business segment.

Operating Results - Nine Months Ended September 30, 2012 Compared to Nine Months
Ended September 30, 2011

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table
and following discussion is on a comparable basis, which excludes the effects of
currency fluctuations.

                            Americas                Asia-Pacific                Europe                    Total
                       $ Change    % Change     $ Change   % Change      $ Change   % Change      $ Change    % Change
Agriculture/Turf
Care                 $     37.0       11 %     $    3.3       31  %     $  (21.9 )    (11 )%     $    18.4        3  %
Construction/Road
Building                   11.1       10          (43.1 )    (31 )          (7.5 )     (6 )          (39.5 )    (10 )
Specialty                   9.1       13           (6.7 )    (24 )         (12.4 )     (6 )          (10.0 )     (3 )
Distribution                6.9        4          (24.2 )    (21 )          (3.4 )     (4 )          (20.7 )     (5 )

Agriculture/Turf Care

Sales into the agriculture/turf care market showed a modest increase of 3 percent during the nine months ended September 30, 2012 compared to the same period in 2011. Agricultural sales in the Americas continue to benefit from high commodity prices as well as a strong sugar cane market in Brazil, although South American sales have been negatively impacted in recent months by restrictive trade laws in Argentina. Sales in the turf care market continue to show improvement due to growing consumer confidence. Agricultural sales in Europe have declined despite continued high commodity prices due to a weakening European

economy. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

Sales in the construction/road building markets declined in Europe and the Asia-Pacific region during the nine months ended September 30, 2012 compared to the same period in 2011, which more than offset increased sales in the Americas. Sales in Europe were down due to a weakened European economy. The sales decline in the Asia-Pacific region was largely due to reduced demand for rollers and transit mixers in China, as well as credit restrictions imposed by the Chinese government. Sales in the Americas benefited from increased demand as a result of renewed investments in aging rental fleets despite depressed residential construction markets and a weak road building market due to limited spending by state and local governments due to budget constraints.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Overall sales into the specialty vehicle market experienced a moderate decline during the nine months ended September 30, 2012 compared to the same period in 2011. Sales in the Americas showed a strong increase due to increased demand for aerial lifts driven by renewed investments in aging rental fleets. Sales in the Asia-Pacific region declined largely due to a saturated railway carrier market and suspended infrastructure programs in China, as well as credit restrictions imposed by the Chinese government. Sales in Europe declined due to weakening forestry and mining markets despite continued strong demand for telehandlers and aerial lifts during the first half of the year.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by segment relates to information as presented in Note 10 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, loss on early retirement of debt, income taxes, and noncontrolling interest.

The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.

                                            Nine Months Ended        Currency       Underlying       Nine Months Ended
(in millions)                               September 30, 2011      Fluctuation       Change         September 30, 2012
Net sales
Propel                                    $         735.3          $     (16.8 )   $     (24.0 )   $         694.5
Work Function                                       294.8                (18.2 )         (33.9 )             242.7
Controls                                            250.7                (12.3 )           0.7               239.1
   Stand-Alone Businesses                           330.6                 (9.2 )           5.4               326.8

Segment income (loss)
Propel                                    $         178.2          $      (5.5 )   $     (25.1 )   $         147.6
Work Function                                        50.1                 (4.5 )          (5.6 )              40.0
Controls                                             71.6                 (3.8 )          (4.7 )              63.1
Stand-Alone Businesses                               51.7                 (1.0 )           5.7                56.4
Global Services and other expenses, net             (32.0 )                1.8            (2.8 )             (33.0 )

Propel Segment

Sales in the Propel segment experienced a 3 percent decrease during the nine months ended September 30, 2012 compared to the same period in 2011, excluding the effects of currency fluctuations. Segment income decreased by $25.1 million, excluding

the effects of currency, primarily due to reduced sales volume. Also . . .